Colombia expects to reap economic fruits of peace

Q: Is the peace process going to generate economic dividends in the short term?

A: I have no doubt about that. There is going to be a positive impact because peace is going to pave the way for investment in a number of sectors across the country. Besides, peace is going to improve the country’s perceived risk. War has always affected the general perception of Colombia, it’s always weighed down its potential. Now investors can perceive Colombia in a less biased way. We are already feeling a positive impact, as the yields on Colombian international and national bonds have been going down in the last few weeks.

Q: Which sectors will be the most positively affected?

A: The sector that will certainly feel a more immediate impact is tourism. Colombia still has a handicap [in the tourism sector] because many countries issue travel warnings [to those interested in travelling to Colombia], which brings down the number of those visiting the country. With the Farc (Revolutionary Armed Forces of Colombia) ceasefire, the perception of the country is going to improve, which means more activity in the tourism sector. Further down the line, we are going to see investment in the agriculture and livestock sector – specifically in the Orinoquía region, where there is potential for crops such as soy, sugar cane or sorghum. This will shore up economic growth significantly.

Q: The National Planning Department (DNP) estimates that peace will add between one and two percentage points to the country’s GDP growth. Are these reasonable estimates?

A: These are indeed reasonable estimates, which are going to materialise over time. I believe the initial impact is more likely going to be in the order of a 1% additional growth. Over the years, as many of the projects in the agriculture sector materialise, we can definitely build on that 1% additional growth.

Q: Land distribution was a key reason that triggered the conflict with guerrilla groups 50 years ago. How are you going to handle it a post-conflict scenario?

A: As part of the agreement with Farc, the government is committed to recover three million hectares of agricultural land to give it to displaced people and other victims of the conflict.

Q: The economy is slowing down and the government has just revised the GDP growth estimate for 2016 downwards to 2.5% from a previous 3%. How will you diversify the economy away from commodities?

A: We are convinced that the economy has to be revitalised to shift away from the commodity sector. We have to promote a new economy giving leadership to sectors such as manufacturing, agriculture and tourism. It’s a paradigm shift. During the commodity boom we had big projects by large companies generating big money for the government to handle. Now we want the economy to be driven by the private initiative of small and medium-sized enterprises (SMEs), focusing first on the domestic market – which is a big market of 48 million people, most of whom belong to the middle class – while the external markets normalise and Colombia can return to exporting goods.

Q: How are you going to achieve it?

A: We are working at fiscal reform, which will make the private sector more competitive as fiscal pressure on companies will go down. At the same time, we are investing in improving national infrastructure through a programme of concessions for our main highways. We are also investing in education and in the development of a strategy to promote productive development by making the most of local productions [?] with high potential. 

Q: Are you considering any special incentives for foreign investment?

A: Foreign investors are treated the same as local investors, with the exception of portfolio investment, where they are subject to a 14% profit tax. We are discussing cuts to that portfolio profit tax, but are still in early-stage talks.

Q: Are these efforts tailored to promote import substitution where possible?

A: We are willing to substitute what we can, and we have already substituted many imports. Industrial production in sectors such as petrochemicals, beverages and clothes production has been shoring up economic growth in recent years. Thanks to import substitutions, Colombian industry has been growing at around 6%.

Looking forward, we will also support exports with higher value added. Our traditional markets, such as Ecuador and Brazil, have become difficult to access these days. But we have free trade agreements (FTAs) with 60 countries and we have to make the most of them, particularly countries such as the US and the European Union, where we can sell products in the light industries (clothing), heavy industries (plastics) and processed food. These products have found their niche in the international markets.

Q: The government had committed to keep the budget deficit within certain levels (3.9% of GDP in 2016, 3.3% in 2017) to gradually limit it to 1% in 2022 – the so-called fiscal rule. Are you going to rethink these parameters to adjust to current economic circumstances?

A: Although there have been rumours that we will relax the fiscal rule, we are totally committed to it and the whole discussion around the new budget fits the framework set by the fiscal rule. It’s clear to the government that the fiscal rule gave it credibility and created trust among investors. If Colombia has been able to handle it during a war, we must do so during an environment of peace.

Q: How are you going to comply with the fiscal rule now that the revenues generated by the oil industry have basically zeroed?

A: We have had to cut expenditure and look for other sources of income, as we are not expecting oil revenues to recover. We lost 3% of GDP in revenues and we have managed to recover half of them [through new sources revenues]; the other half has been expenditure cuts.

Q: Have you already come up with a budget for the peace process?

A: Peace is certainly going to be costly, but war is even more costly. We are not going to make peace and drive new investment overnight. It’s going to be a gradual process, and we are not going to weaken investors’ trust in the country, which is built around fiscal responsibility. We cannot achieve peace at the expense of fiscal responsibility. That is a very powerful combination and we want peace to go hand-in-hand with fiscal responsibility.